The chart illustrates that economic contraction has hit the major developed economies, and significantly slowed the major developing economies (not in the chart). The G20 met over the weekend to discuss the global economic and financial playbook. Based on the fact that the prominent Econ bloggers have hardly touched the subject, I presume that they concur with my assessment of the Summit: the G20's heart was in the right place, but the laundry list of economic policy goals are unlikely to be met by policy makers at this time.
The rather vague economic statement from the G20 was:
“Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:
- Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.
- Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.
- Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
- Help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund’s (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility.
- Encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda, and we welcome the recent introduction of new facilities by the World Bank in the areas of infrastructure and trade finance.
- Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.”
Rebecca here. Where’s the beef? Global financial crises are few and far between – WWII and Asia in the 1990s come to mind - and for this reason, the financial front of the G20 Summit was important. But they botched that up, too; the G20 said that they would:
- Strengthening Transparency and Accountability
- Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances.
- Promoting Integrity in Financial Markets: We commit to protect the integrity of the world’s financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions.
- Reinforcing International Cooperation
- Reforming International Financial Institutions: We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness."
RW: Finally, the G20 statement provided a long list of actions that will be taken before March 31, 2009, with my favorite being:
“Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.”I hope that they have already reassessed their risk management models! However, what was not mentioned and what was never a possibility is a formal Bretton-Woods style fixed exchange rate regime based on the price of gold. But I guess that the markets were somehow expecting a fixed exchange rate regime to come out of the G20 meeting because gold rallied before the Summit.
Markets are irrational and will stay that way until the heightened uncertainty subsides. The global economic contraction – as measured by the G7 in the chart above – is already underway, and until global policy makers make good on their promises, uncertainty will continue to cloud the global economic outlook. However, The Baseline Scenario brings up a good point (hat tip, Mark Thoma). Regulation in the financial markets is a nice goal that could be hazardous if undertaken too quickly.
*The G20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union